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increase their capital stock to K ** from (1 – δ) K 0 . II. Self-Fulfilling Credit Ratings Our textbook model can now be used to highlight the problem of self-fulfilling credit ratings. Suppose that the economy is initially at the “good” equilibrium: private domestic investment is relatively high and the country-specific risk premium is relatively low. However, triggered by extraneous shocks, the country may switch abruptly from this “good” equilibrium to the “bad” equilibrium. Such expectations-coordination failure may happen if some political factor serves to